Debate: Expiring Bush tax cuts for the wealthy in 2010

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Background and context

In 2001 and 2003 President Bush made large tax cuts for all classes of society - lower, middle, and wealthier classes. Given the dire fiscal circumstances the country faced in 2010 - with a deficit of $1.9 trillion in 2009 and national public debt of $8.6 trillion -

President Obama and others proposed letting the Bush tax cuts expire on the top 2 to 3 percent of American households (couples making more than $250,000 a year, individuals making more than $200,000). They would be permanently extended for everyone else. This would generate $700 billion in tax revenue from the wealthiest 2 to 3 percent every year after implementation, helping cut the deficit by that same amount. This is the main rationale leveled by supporters of expiring the Bush tax cuts to the rich in 2010. But, opponents say that doing so while the economy struggles to recover would risk a double-dip recession. There are many arguments back and forth on these points, and they are documented below.

Recovery: Would expiring the bush tax cuts dampen the recovery?

Pro

Tax cuts for rich can be safely expired as they offer least stimulus"A Real Debate on Taxes." New York Times Editorial. August 23, 2010: "Tax cuts for low-, middle- and upper-middle-income taxpayers should be temporarily extended because those taxpayers tend to spend most of their income and the economy needs consumer spending. That would cost roughly $140 billion next year, but the spur to the economy is more important than the budgetary impact. [...] Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings. The revenue from letting these expire — nearly $40 billion next year — would be better spent on job-creating measures."

Extending Bush tax cuts for the rich only benefits top 1%Paul Krugman. "Now that's rich." New York Times. August 22, 2010: "And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But that’s the least of it: the policy center’s estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he’s going to get the majority of that group’s tax break. And the average tax break for those lucky few — the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year — would be $3 million over the course of the next decade."

Revenue from higher taxes on rich could be reinvested Revenue coming from higher taxes on the rich can be reinvested into the economy to stimulate growth, instead of just sitting in the bank accounts of the wealthy. Now, it is true that some wealthy will directly invest this money. But, certainly not all do so. Taxing and reinvesting that money assures that it re-circulates around the economy.

Sarah Palin said in early August 2010 on Fox News Sunday that it is "idiotic to think about increasing taxes at a time like this" and that cutting them will "lead to even fewer job opportunities for Americans."[2]

Extend Bush tax cuts temporarily, foster recovery, then expire them CBO Director Douglas Elmendorf told CNN: "[It would provide] a considerable boost to economic activity in 2011 and beyond for a few years." This is precisely when the economy needs such a "considerable boost." While it is true that he then said, "Over time, [however,] the negative consequences of very high federal borrowing build up," extending the tax cuts should be seen as a short-term thing; something that would be ended as soon as the economy has had a chance to recover (within a couple of years). This means helping stabilize the economy, while taking measures to address the longer-term deficit problems in the nation.[3]

Letting Bush tax cuts expire will slow economic growth 2010 Congressional Budget Office Report: "CBO assumes that tax reductions enacted earlier in this decade that are currently set to expire at the end of this year do so as scheduled; ... Under those assumptions, the federal budget deficit would decline substantially over the next two years—to 4.2 percent of GDP in 2012—and, consequently, the budget would provide much less support to the economy than has been the case for the past two years… CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014."[4]

Small businesses: Will expiring Bush tax cuts hurt small businesses?

Pro

Expiring Bush tax cuts for rich will affect only 5% of small businessesWilliam Gale. "Five myths about the Bush tax cuts." Washington Post. August 1, 2010: "If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year. And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses."

Small businesses depend on product demand, not tax breaks for wealthy A 2010 Congressional Budge Report Found: "Increasing the after-tax income of businesses typically does not create much incentive for [small businesses ] to hire more workers in order to produce more, because production depends principally on their ability to sell their products." In other words, if you're worried about the fragile state of the economy and you want to do something to make sure recovery is not set back, there are any number of more effective ways to spend that money. Continuing to help states pay their Medicaid bills would be one.[6]

Supply side economics has proven a major failure.Robert Creamer. "Why Congress Must End Bush Tax Breaks for the Rich." Huffington Post. July 28th, 2010: "The 'supply side experiment' turned out to be a colossal failure. For eight years, George W. Bush applied the theory in its purest form: increase tax breaks to the rich, eliminate regulations on Big Oil, insurance companies and Wall Street. The results are there for everyone to see. The New York Times reported last year that, 'For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.' In fact, since George Bush and the Republicans in Congress passed two massive tax cuts, we have seen a massive, secular decline in the creation of private sector jobs."

Ending Bush tax cuts just returns taxes to sustainable levels The Bush tax cuts were supposed to be abnormal, a temporary boost to the economy. Ending them merely returns taxes to ordinary, sustainable levels. Therefore, ending them should not be seen as a "tax increase" per se, but just a return to normalcy.

Bush tax cuts were designed to expire for a reason. The Bush tax cuts were designed to expire for a reason. They were never seen as a permanent fixture, even by those that created them, but as a way to boost the economy. They were supposed to expire, and so the proposal to extend all of them except for the rich is generous.

Tax cuts for rich were especially responsible for creating deficit. When asked in July if the House leadership would consider a bill to extend all of the Bush tax cuts, as Republicans and some Democrats have advocated, Nancy Pelosi said, "No. No. Our position has been that we support middle-income tax cuts. The tax cuts at the high end have increased the deficit enormously."[7]

Con

Deal with deficit later, stimulate economy now; extend tax cuts Eric Cantor: "If you have less revenues coming in to the federal government, and more expenditures, what does that add up to? Certainly you are going to dig the hole deeper, but you also have to understand if the priority is to get people back to work, is to start growing this economy again, you don’t want to make it more expensive for job creators."[8]

Bush tax cuts are a minor contributor to the deficitWilliam Gale. "Five myths about the Bush tax cuts." Washington Post. August 1, 2010: "4. The Bush tax cuts are the main cause of the budget deficit. [...] Although the cuts were large and drove revenue down sharply, they are not the main cause of the sizable deficit that exists today. In 2007, well after the tax cuts took effect, the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of the economy. The Bush tax cuts didn't change between 2007 and 2009, so clearly something else is to blame. [...] The main culprit was the recession -- and the responses it inspired. As the economy shrank, tax revenue plummeted. The cost of the bank bailouts and stimulus packages further added to the deficit. In fact, an analysis by the Center on Budget and Policy Priorities indicates that the Bush tax cuts account for only about 25 percent of the deficit this year."

Deficit problem is entitlement spending, not Bush tax cutsDebra J. Saunders. "Ending the Bush tax 'cuts' is a tax increase." San Francisco Chronicle. August 15th, 2010: "For my part, I don't want to hear another conservative pundit call for more tax cuts until the there's a closure of the gap between what Washington takes in and what it promises and spends. If that day never comes, well, someone has to pay for the party. Rep. Paul Ryan of Wisconsin stands out as the rare Republican willing to challenge the Democrats' "culture of dependency" by proposing painful cuts on Social Security, Medicare and Medicaid spending. He, at least, is willing to tell the middle class that entitlement spending is "unsustainable." Ryan is the adult in this room. As David Walker, head of the Peter G. Peterson Foundation and former U.S. controller, told The Chronicle's Carolyn Lochhead last week, 'If you eliminated all the Bush tax cuts, if you withdrew from Iraq and Afghanistan tomorrow, if you eliminated foreign aid, and if you eliminated all spending associated with congressional earmarks - the populist things - it's about 15 percent of the problem.'"

Bush tax cuts are wrongheadedly on borrowed money Former Fed Chairman Alan Greenspan said on Sunday's Meet the Press that extending the Bush tax cuts without offsetting the costs elsewhere could end up being "disastrous" for the economy. "I'm very much in favor of tax cuts but not with borrowed money and the problem that we have gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money."[9]

Con

Raising taxes is always bad for the person payingMegan McArdle. "Should We Raise Tax Rates on the Rich?" The Atlantic. August 9th, 2010: "The other question is, isn't there some upper limit on tax brackets for the wealthy? When the Bush tax cuts expire, that top rate will go to 39.5%. Then there's the 2.9% Medicare tax, and the 0.9% Medicare surtax we just enacted. There are, for those living in places like New York, New Jersey, California, or DC, state and local income taxes that can add an extra 5-10% onto the tax bills. We're now well over 50% marginal rates before we've even considered things like property and sales taxes. When more of your extra dollars are going to the government than yourself, I think it's a problem, even if you're very rich. I think that has to be factored into any argument about the "fairness" of the tax system."

Expiring Bush tax cuts will send right fiscal message to world Timothy Geitner said in 2010: "We think [expiring the bush tax cuts for the wealthy is] the responsible thing to do, because we need to make sure we can show the world that [we're] willing as a country now to start to make some progress bringing down our long-term deficits."[10]

Con

Public opinion: Where is public opinion in this debate?

Pro

Majority support expiring Bush tax cuts for wealthy An August 2010 CNN/Opinion Research poll found that 51 percent of Americans support repealing Bush's tax cuts for the wealthiest families.[11] Another poll by Society for Human Resource Management and National Journal Congressional Connection found: "30 percent of Americans believe all of Bush's 2001 and 2003 cuts should stay in place. That compared to 31 percent who believed that all of them should be repealed. Twenty-seven percent take the route Obama campaigned on: Tax cuts for the wealthy should be repealed, while the others should stay in place. [. . .] Independents hewed closest to the overall sample. Twenty-seven percent said all the tax cuts should be kept in place. Thirty-two percent said they all should be repealed. Twenty-seven percent said the tax cuts for the wealthy should be repealed, but the middle class cuts should be kept in place."[12]